2013 (11) TMI 264 - AT - Income Tax

Addition on account of section 68 - Income to be determined on estimate basis Unexplained sundry creditors - Assessee is an individual and is engaged in trading in Iron and Steel materials under the name and style of M/s. Vaishno Steel as a proprietary concern - A search and seizure action u/s.132 of the Income Tax Act was conducted at the residential premises of Sri Satish S Luthra of Nasik during which certain books of accounts of M/s. Vaishno Steel which were belonging to the assessee were seized - AO initiated proceedings u/s.153C of the Income Tax Act Held that - Examination of the seized materials show that blank bills/vouchers pertaining to some of the parties appearing as sundry creditors in the books of the assessee were recovered during search action u/s.132 pertains to Sri Vikas P. Guptha, i.e. assessee - Despite sufficient opportunities given, the assessee could not prove to the satisfaction of the AO regarding the genuineness of the sundry creditors appearing in the balance sheet as at 31-03-2004, 31-03-2005 and 31-03-2006. Therefore, the sundry creditors appearing in the books of account, under the peculiar facts and circumstances of the case cannot be accepted as genuine and some addition has to be made. Addition of the total sundry creditors under the facts and circumstances of the case will give absurd result which is not possible in the type of trade the assessee is engaged in Also, it is not reasonable to add 3% profit as may be determined on the unproved trade creditors - Under the facts and circumstances of the case, this is a fit case for rejection of the book results and going for estimated addition - Considering the totality of the facts and circumstances of the case, adoption of 1% Net profit on the turnover for various assessment years will be reasonable and will meet the ends of justice Decided partly in favor of Revenue.

Summary

Issues Involved:
1. Applicability of Section 68 of the Income Tax Act to sundry creditors.
2. Admission of additional evidence by CIT(A) under Rule 46A.
3. Justification of the addition made by the AO as unexplained credits.
4. Determination of the appropriate method for assessing the income related to sundry creditors.

Issue-wise Detailed Analysis:

1. Applicability of Section 68 of the Income Tax Act to Sundry Creditors:
The primary issue was whether Section 68, which deals with unexplained cash credits, could be applied to sundry creditors arising from trade purchases. The AO treated the sundry creditors amounting to Rs. 4,66,93,594/- as unexplained credits under Section 68 because the assessee failed to provide confirmations or produce the creditors for verification. The CIT(A) held that Section 68 was inapplicable as the credits were trade-related and supported by bills and ledger entries, distinguishing them from cash credits. The Tribunal agreed with the CIT(A), emphasizing that Section 68 pertains to cash credits and not trade creditors, thus invalidating the AO's application of Section 68.

2. Admission of Additional Evidence by CIT(A) under Rule 46A:
The assessee submitted additional evidence to the CIT(A), including details of sundry creditors and confirmations from some parties. The AO objected, arguing that the assessee had ample opportunity during the assessment to provide these details. However, the CIT(A) admitted the additional evidence, reasoning that it was necessary to substantiate the genuineness of the purchases. The Tribunal upheld the CIT(A)'s decision, noting that the additional evidence was crucial for a fair assessment and that the AO had the opportunity to review it during the remand proceedings.

3. Justification of the Addition Made by the AO as Unexplained Credits:
The AO added the entire amount of sundry creditors as unexplained credits due to the non-cooperation of the assessee and the inability to verify the creditors. The CIT(A) deleted this addition, stating that the purchases were genuine and supported by substantial evidence, including bills and ledger entries. The Tribunal concurred, pointing out that the AO had accepted the sales and purchases but erroneously treated the creditors as unexplained. The Tribunal emphasized that the AO's approach was unreasonable and not supported by the facts.

4. Determination of the Appropriate Method for Assessing the Income Related to Sundry Creditors:
The Tribunal found that the AO's method of adding the entire amount of sundry creditors was excessive and would lead to an absurd result. Instead, the Tribunal adopted a net profit rate of 1% on the turnover for the respective assessment years, considering it a reasonable approach under the circumstances. This method was consistent with the practice in similar cases and ensured a fair assessment of the assessee's income.

Conclusion:
The Tribunal partly allowed the revenue's appeals by modifying the assessment method to a 1% net profit rate on turnover, while dismissing the assessee's cross objections. The judgment highlighted the importance of distinguishing between trade creditors and cash credits under Section 68, the admissibility of additional evidence under Rule 46A, and the necessity of a reasonable approach in assessing income related to sundry creditors.